Beware of Greeks Bearing Referendums

On Monday night, the nation’s Prime Minister, George Papandreou, shocked his colleagues, his countrymen, and the rest of the world by announcing he would hold a referendum on a new bailout package, which other European countries agreed upon last week as part of a broader effort to contain the continent’s debt crisis. Today, markets everywhere are plunging, which is hardly surprising.

Just when it seemed like there was going to be a respite from the debt crisis, albeit perhaps a temporary one, Papandreou has thrown the whole thing into question again. If the Greeks were to vote down the European rescue package, which involves yet another round of austerity measures, they would be opting for a sovereign debt default, and, in all probability, Greece’s exit from the euro zone. Even if the Greeks approve the package, the markets face two months of chronic uncertainty before a vote not expected until January.

With a parliamentary majority of just three votes for his Socialist Party government, Papandreou appears to have seen a referendum as a clever political gambit. While most Greeks oppose the tax increases and budget cuts that have come with successive European bailouts, they still strongly support membership of the European Union. In offering voters a referendum, Papandreou is effectively asking his countrymen to choose which option they like least: more austerity or an exit from the euro zone.

As of today, though, it looks like the Prime Minister was being too clever by half. From every side came angry denunciations of his action. The Irish foreign minister accused him of lobbing a “grenade” into the European rescue efforts, adding, “Legitimately there is going to be a lot of annoyance about it.” In Germany, politicians called for preparations to eject Greece from the E.U.

Greeks, too, are outraged. Six of Papandreou’s party colleagues called on him to resign. One quit the PASOK party. “They must be crazy,” a senior executive at one of Greece’s biggest companies told Reuters. “(T)his is no way to run a country.” With a parliamentary vote of confidence in his government scheduled for Friday, it is quite conceivable that by the end of the week Papandreou will be out office.

And yet, for all that, he has a point about Greece needing to make a definitive decision about what course it wants to follow. For months now, his political opponents have criticized him for accepting the onerous terms of the European bailouts, which include job cuts, tax increases, and privatization programs. But Greeks also seem reluctant to embrace the alternative path, which involves defaulting on its debts, leaving the euro zone, at least temporarily, and trying to make its way alone.

Outside the euro zone, Greece could relaunch its old currency, the drachma, which would trade at a much lower rate than the euro, meaning its exports would be cheaper abroad. The country’s banking system would probably collapse—it’s pretty much a basket case already—inflation would rise, and there would be a period of chaos. But, relieved of its debts, the economy would eventually start growing again. At least that’s what happened to Argentina, which, back in 2002, defaulted on its debts and abandoned a one-to-one peg between the peso and the dollar.

And what if the Greeks stay with the euro? Even after the writedowns that were agreed to as part of the latest deal, the country’s debts would be very large: at least a hundred and twenty per cent of G.D.P., and probably more. Tethered to the European currency, the only way for Greece to grow and prosper would be by reducing its labor costs—i.e., cutting wages—relative to other European countries and making its exports more competitive. With its fiscal policy dictated by Berlin and Paris, this would involve many more years of grinding austerity.

Faced with two unappetizing choices, Greece seems intent on choosing neither. Papandreou, for reasons of his own, is intent on forcing it to choose. But rather than doing that, it may well get rid of him and put together a new “national unity” government that will give the Greeks what they really want: a European bailout and the right to complain and protest about it.

Meanwhile, the rest of Europe is left to do what it has done many times before: bad mouth its southern neighbor.

Above: George Papandreou arrives at the Greek parliament in Athens on Tuesday. Photograph by Louise Gouliamaki/AFP/Getty Images.